5 Role of source documents in business

Business financial activities can only be done through source documents. Without them, it might be difficult to prove that a transaction took place. A business must not be built by trust alone. But also by hard evidence. This will safeguard the business from bad elements. In this article, we consider five roles of source documents in business. 

What are source documents

First of all, a source document is a document that serves as evidence of a financial transaction with a third party such as customers and vendors. It is proof that a transaction has occurred between a willing seller and buyer. When this document is not issued, it is possible to deny that the event did not occur. It is important to note that this document must be kept for seven years for tax purposes.

Types of source documents

Here we state the types of source documents based on their classification. Therefore, we have:

1. Invoices

Invoices serve as evidence that a sale or purchase has occurred on credit terms.

2. Orders

An order signifies an interest by one party to buy an item(s) of what the other party deals with. An example is a purchase order.

3. Bills

Instruction to make payments for a service is done via bills. When an individual receives a bill, it signifies that he or she must make payment for the item. An example is electrical and telephone bills.

4. Notes

A note explains what has transpired from a transaction. It tells the seller that the transaction is yet to be completed. An example is a promissory note which tells the buyer that he promises to make payment at a particular date.

5. Receipts

Receipts are evidence that a cash payment has been made for a transaction.

6. Payment vouchers

This is an internal document used by businesses to make payments for expenses and expenditures. A payment voucher must be authorized by the internal control department. 

5 Roles of Source documents in business

1. Evidence of transaction

Source documents serve as proof that a transaction occurs. Therefore, if a party believes that the event does not take place or something is missing such as an incorrect amount, through the source document the matter can be settled.

2. Use for court cases

In the event of litigation by one party against another in a trade, the source document can serve as concrete proof of the transaction. 

3. Audit trail

Source documents are important for the audit trail. This is especially true when call overs are done by an auditor. Generally, auditors carry out audit trails to trace transactions to the trial balance and of course the financial statement.

4. Reconciling accounts

When an account has an issue or fails to reconcile, it is possible to solve the problem through source documents. It might be that a source document was not posted to the ledger account.

5. Memorandum accounts

Accounts that are memorandum in nature are control accounts. Therefore, it is from the source documents that they are prepared so that they can be used to monitor the main account. A good example here is an accounts receivable control account.